From Currency Bands to Floating Currency

©image: CentralAmericaData.COM

The report remarks that “one of the preconditions to move towards an inflationary targets system is the existence of a flexible way to determine the exchange rate, allowing the bank to focus its monetary policy on reaching said inflation targets, without worrying for exchange rate pressures”.

Looking for said flexibility, the bank decided, back on October 2006, to replace the former mini-devaluations regime, in place since the 1980s, with a currency bands system. In it, the bank establishes minimum and maximum values, allowing the currency to float freely between them.

Now BCCR announces its intention of gradually migrating to a “flotation regime that allows the bank to execute monetary policy while being totally independent from currency exchange commitments”.

The report listed some of the pending tasks to move towards a flotation regime: “defining intervention rules for the currency exchange market, increasing the level of integration and competition of this market, and triggering the development of currency hedging instruments”.

Source: CentralAmericaData.COM

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